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Saudi Arabia, OPEC, and Russia: The Conflicts of $60 Crude Prices.

November 15, 2017

The new political risk from Saudi Arabia that arose from the Crown Prince Mohammed bin Salman detaining several prominent business people within the country, including officials and princes, results in uncertainty for oil investors. Given that Saudi Arabia is the world’s second-largest crude producer and the biggest exporter, oil prices are heavily affected by political developments. Until the smoke clears, the market will continue to put a risk premium on the oil prices.

Crude moved past $60 per barrel for the first time in two years due to these developments, and at $70 a barrel the US shale supply would soar; rising oil prices allow shale companies to increase operations. The Energy Information Administration expects mean U.S. lower-48 oil production to ramp up by 620,000 barrels / day in 2018. That estimate will be adjusted upwards if oil prices continue upward. With these numbers in mind, Saudi Arabia is facing challenges on the supply side of the oil market and is unlikely to make big shifts in policy. Current ministers will moderately attempt to curb production by almost two million barrels a day throughout 2018 as producers target drawdown inventories and bolstering prices.

Within these dynamics Russia seems reluctant to let prices rise far, suggesting that at $60 a barrel enhances the possibility of it ditching the output agreement. The oil minister mentioned that OPEC and its partners still have five months to decide whether to extend the agreement and that an extension is dependent on market conditions.

Keith Knutsson of Integrale Advisors commented, “The rising oil prices are certainly an interesting development in the Saudi Aramco IPO; the president has already suggested a New York listing for the 2018 IPO of the state’s energy giant.”

 

This article originally appeared on my blog Here.

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